Module III· DCM — High Yield & HybridAdvanced
Question
What is a distressed exchange / coercive exchange, and how does it differ from a regular exchange offer?
Answer
Distressed exchange
A financially stressed issuer asks bondholders to exchange old debt for new debt with worse economics, such as lower principal, longer maturity, lower coupon, or PIK features.
Why coercive
Bondholders may accept because the alternative is insolvency, default, or worse recovery.
Structures
- Discount exchange: old 100 claim becomes new 75 claim.
- Maturity extension: bondholders accept longer-dated paper.
- Up-tier exchange: participating holders receive more senior / secured debt.
- Exit consent: tendering holders vote to strip covenants from old bonds.
Difference from regular exchange
A regular exchange can be liability management for convenience. A distressed exchange is a restructuring tool and may be treated by rating agencies as selective default.
Pitch tip
Distressed exchange is often an out-of-court restructuring alternative, but holdout management is critical.